David Li resigns from Hong Kong's executive council

The chairman of the Bank of East Asia has bowed to public pressure and resigned from Hong KongÆs top policy-making body.
Bank of East Asia chairman David Li has bowed to mounting public pressure over insider dealing-related charges and resigned from Hong KongÆs cabinet Exco (executive council).

Exco advises the chief executive on policy. Li's resignation comes two weeks after agreeing to pay the US Securities and Exchange Commission (SEC) a fine of $8.1 million to settle insider dealing-related charges, though, as is usual with these cases, Li has neither admitted nor denied the charges.

Hong KongÆs chief executive, Donald Tsang, said in a statement announcing the resignation that Li, ôregretted that the matter had caused public concern and thus wished to resign from the councilö. Tsang said he had asked Li to reconsider his resignation, adding, ôI will miss him greatly and hope that he will continue to serve Hong Kong in other areas.ö

Shareholder rights activist and editor of webb-site.com, David Webb, who has played a prominent role in drawing attention to the issue, told FinanceAsia: "ItÆs a good first step but I think the chief executive should have taken the initiative rather than resist his resignation.ö

LiÆs resignation is a setback for Tsang. ItÆs the first resignation from his Exco since taking over from Tung Chee Wah in 2005. Li is a close friend of TsangÆs and an important politically ally, having run TsangÆs election campaign in both 2005 and 2007.

The reputational blow to Li is immense since he heads a highly influential family in Hong Kong and sits on the boards of numerous listed companies in Hong Kong and abroad. He is also on a number of important government advisory committees. Li was knighted by the Queen of England in 2005 for services to British education, though he gave up his British citizenship to join Exco that same year.

The SEC charges related to the leaking of insider information about News CorporationÆs takeover bid for Dow Jones. The SEC says that Li, who was a Dow Jones board member, leaked information of the takeover before it became public to his friend and business partner Michael Leung, who made a profit of $8.1 million after trading on this information. Leung, his son-in law KK Wong, whose Merrill Lynch account was used to buy the shares, and Leung's daughter Charlotte, who is married to KK Wong, have also agreed to settle with the SEC and give up their trading profits.

The SEC civil complaint states that Li ôknew or was reckless in not knowingö both that he had passed non-public information to Leung, and that Leung would try to profit from this information.

Li said in his resignation statement that the public discussion following his agreement to settle with the SEC, ôis now becoming an increasing distraction to the chief executive and the executive councilö. He said that under the terms of his agreement with the SEC he was unable to respond to questions from the public or the media and this had put pressure on the chief executive and other Exco councillors.

ôIt would be highly unfair to the chief executive and my fellow executive councillors for me to allow the current situation to continue,ö he added.

Li who represents the financial services sector in the legislative council (Legco) said he intended to continue with his duties as a legislative councillor. But he may find that he will come under pressure to resign from that body as well.

ôThe focus should shift to the legislative council. It is time for the banks to select someone more appropriate to represent them and for David Li to resign from that position,ö says Webb.

Rumours of the SEC settlement surfaced in January, but were denied by Li. Final agreement to the terms of the settlement appears to have been stretched out so that the eventual announcement occurred on February 6 when local newspapers had stopped publishing for the Chinese New Year holiday.

When the newspapers resumed publishing, the Li story was kept off the front pages by a scandal involving the publication of hundreds of nude pictures of Hong Kong starlets on the internet which has transfixed the territory for the past fortnight.

However, the Li affair was kept alive by Webb who polled members of his website on the issue. Out of the 1,200 participants in the poll, 93.4% voted that Li should resign from Exco, 89.4% that he should step down from Legco, and 67% that he should resign as chairman and CEO of Bank of East Asia.

Webb sent the poll results together with an open letter to Donald Tsang. ôIf you wish your administration to have the respect of the public and international community, then you must require Mr Li to step down from the executive council without further delay. Good governance demands it. Please put Hong Kong's reputation as an international financial centre ahead of your personal friendship. We cannot allow a perception that the elite can buy their way out of allegations (at a cost greater than most citizens will earn in a lifetime) and retain public office,ö he wrote.

Li has been a Legco member for the financial services functional constituency since it was set up in 1985. During that period he has been challenged once û in 2000 û though he won with a wide majority.

The feeling among some commentators is that if Li stays in Legco and ignores the views of the public then this simply undermines the lack of accountability inherent in functional constituencies.

In light of the SEC settlement, the Hong Kong Monetary Authority (HKMA), as part of its statutory oversight of the banking industry, is obliged to consider whether Li, who is both chairman and CEO of BEA, is a fit and proper person to continue in these roles under its guidelines. Standards for banking executives are considerably higher than for ordinary company directors as public money is involved.

The HKMA has so far remained silent on the issue, saying that the banking ordinance prevents it from commenting on individual cases.

It is possible that the HKMA may ask the bank to find another CEO. Although the BEA board has come out in support of Li, it could be that the bank may use the occasion to address the issue of succession since Li will be 69 in March.

In addition, the Li family is thought to have only about 15% of the bankÆs shares though it is not clear how these will be voted given the disparate nature of the family. The familyÆs hold on the bank is fairly tenuous as was demonstrated some years ago when a general mandate to issue new shares without a rights issue was voted down by institutional shareholders. In recent years it has been regarded as a possible takeover target, though it took on significant minority shareholders last year with BOC (HK) acquiring a 4.9% stake and Spanish Bank La Caixa an 8.9% stake.

Li sits on a number of prominent government committees. These include the HKSAR Banking Advisory Committee, which advises the chief executive on banking and financial issues. Li, possibly because he is the legislative member for the sector, has been a member of this committee since 1981 while others have served no more than the normal six years. His current term is due to end in December this year. Rather than asking him to resign, the HKMA may take the more diplomatic approach of not reappointing him. Indeed this is likely to be the route that other organisations of which is a member will also take if they feel it is inappropriate for him to remain with their organisation.

Li is also on the HKSAR Land Fund Advisory Committee and the Mandatory Provident Fund Schemes Authority. He is chairman of the Chinese Banks Association, pro-chancellor of the University of Hong Kong and chairman of the Hong Kong Management Association.

He is either a director or non-executive director of the following listed companies: Cable & Wireless HKT, Hong Kong and China Gas, China Merchants China Direct Investments, China Overseas Land & Investment, COSCO Pacific, FPB Bank Holding Company, San Miguel Brewery, Sime Derby, SCMP Group, Vitasoy International and Henderson Cyber.
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